Nelson Peltz’s recent activist investment at Disney has taken over the airwaves recently. It’s provided us with an inside look at the strategic decisions made at Disney over the past few years and their impact on the company’s performance. However, the Disney-Peltz saga also sheds light on expectations from corporate leaders on delivering against one of their key goals — creating long-term shareholder value. 

In this article, we will discuss the natural implications it’s bound to have on corporate strategy and development leaders' expectations as they build their plans for 2023 and beyond. 

Understanding the Crux of Peltz's Argument Behind Driving Disney's Change 

Disney's performance over the past year has been less than stellar. While its foray into streaming served as an incredible tailwind in the stay-at-home economy, the capital intensity of the initiative has resulted in diminishing returns, cutting its market value in half over the past year while losing $1.5B in the process. And although Disney's revenues increased by $24B to reach $84B, operational margins were more than half, causing the company to ditch its dividends. 

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As Nelson Peltz’s Trian took a stake of approximately 9.4M shares in Disney, he intends to help the entertainment industry giant restore its magic. He shared the following key reasons contributing to Disney's poor performance: 

• Inefficient capital allocation — since 2018, EPS has been cut in half despite $162B spent on M&A, CapEx, and content — approximately equal to Disney’s entire current market cap
• Lack of corporate governance measures resulting in poor succession planning and poor shareholder engagement
• Flawled direct-to-consumer (DTC) strategy struggling with profitability, despite reaching similar revenues as Netflix and having a significant intellectual property (“IP”) advantage
• Over-earning in the Parks business to subsidize streaming losses

In turn, Peltz used this to mount his case for obtaining a seat on Disney's board. And given his track record of helping companies turn around their performance and making them more profitable, he felt he was more than apt to take charge of improving Disney's performance. 

For example, in 2018, Petlz joined Procter and Gamble's (P&G) board. At the time, P&G was underperforming for an extended period. Peltz's observation of P&G's performance was that the company's highly matrixed organizational structure was holding it back. 

After joining the board, Peltz moved to "de-matrix" P&G, creating an end-to-end P&L and operations responsibility while reducing the number of business units to create a more streamlined operational model. This initiative resulted in the average organic growth increasing to 6% in 2019-2021 compared to 2% in 2014-2018, and the adjusted EBIT margin increasing to 24% in 2021 compared to 20% in 2014. 

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And this is just one story of his success. Peltz accomplished much of the same for Heinz in 2017 and DuPont in 2015. So given the situation, what was Petlz's suggestion to Disney to turn the tides of its performance? Based on Trian’s website, they are as follows: 

• Develop an effective succession plan 
• Align compensation with performance
• Improve streaming DTC model operating margins 
• Scale back capital expenses
• Refocus creative engine to drive growth 
• Enhance accountability 
• Reinstate dividends by FTY 2025

The Takeaways for Corporate Strategy and Corporate Development Professionals 

The Disney-Peltz story is a potential leading indicator of what lies ahead. After two years of the post-covid boom and what in hindsight seems like exuberant investment in growth at all costs, companies are having to relook their strategies. 

Corporate strategy and development professionals will be called upon again to relook how they build organic and inorganic growth strategies with effective capital deployment. A few things they need to keep in mind are:

1. Carefully Reviewing M&A Deal Structure‍

M&As are great levers for driving growth, diversifying product portfolios, and expanding into new markets. However, the complexity of these transactions is known to all. Valuations are influenced by prevailing market multiples, and the accuracy of estimated efficiencies gained through synergies can make or break the success of deals.

While the challenges of the 21st Century Fox acquisition may be evident now, hindsight is often 20-20 in M&A transactions. Consider Salesforce’s acquisition of Slack in 2020. 

Acquired at a multiple of around 26 times forward revenue, the Slack deal raised high expectations. Fast forward to today, and the jury is still out on the benefits Salesforce can gain from a well-integrated ecosystem.

Another example is AT&T's $67 billion acquisition (including debt) of DirectTV ahead of the streaming wars. The move to acquire DirectTV served as a lesson on the importance of timing and keeping an eye out for tectonic shifts that may be on the horizon. Six years later, AT&T offloaded 30% of DirectTV at nearly 1/3rd the valuation. 

While advisors expect M&A deals to pick up in 2023 following last year’s slump, when that will happen remains an open question. Considering today’s high interest-rate environment, corporate development leaders must expect each transaction to come under intense scrutiny from boards and investors. 

2. Streamlining Operations to Drive Efficiency and Avoid Operational Bloat

The value of streamlining operations and driving efficiencies can't be stated enough. It's why 60% of executives from a PwC Pulse Survey cited digital transformation as their most critical growth driver in 2022. 

By streamlining and automating repetitive and manual processes, organizations can reduce the time and resources required to complete tasks and improve productivity and operation efficiency in the process. It also frees teams to focus on their core competency to drive further productivity, reduce costs, and enhance overall performance. 

However, these critical enterprise transformation initiatives can be capital-intensive and require significant human-resource investment. CNN+ is another cautionary tale on this front. After investing $300M into building out a digital streaming service, which appears to be key to long-term success in the entertainment business, it was forced to shut down the service just weeks after launching due to a lack of demand. 

Looking ahead in today’s uncertain environment, corporate leaders may be called upon to build more agile plans for such initiatives with well-defined milestones to test the impact and pivot quickly as needed. On the talent front, companies could explore a flexible talent acquisition model that enables access to onboarding the right talent quickly and at the right time while keeping fixed costs low. 

3. Importance of Accurate Forecasting and Tracking Spending‍

Ensuring optimal resource allocation and improving efficiency starts with effective forecasting and planning. It's one of the best ways companies can prepare to address future events and trends, serving as the underpinning of successful strategic planning. 

Likewise, had Disney's team implemented a stronger forecasting and planning mechanism, the team could have likely curtailed the impact of its 21st Century Fox acquisition, the pandemic, and more. The team would have been better able to mitigate impacts in real-time while capitalizing on positive ones. 

Understanding any company's current and future financial state requires keeping a keen eye on spending. Recurring cost analysis and rigorous spend tracking allow companies to identify cost-reduction opportunities, explore alternative and more cost-effective solutions, and understand the basis behind spend.

More importantly, undertaking these initiatives regularly helps teams better forecast budgets and identify trends and patterns in use and spending. In doing so, teams can pinpoint which vendors and suppliers provide the best value while enabling the company to attain the financial stability to navigate today's business landscape successfully. 

4. Focusing On Corporate Governance and Great Leadership for Long-Term Business Success

In an environment where companies are being forced to clamp down on spending and layoffs events start to rise, the importance of corporate governance becomes ever more critical. 

While companies across sectors experience economic headwinds and performance gets strained, the performance of the boards of directors is likely to come under the scanner as well. As boards look to stay ahead of such scrutiny, corporate strategy leaders can expect boards to be more involved in the critical aspects of strategy formulation and delivery. 

Another key learning from the situation at Disney is the importance of succession planning across your leadership team and its influence on long-term success. By virtue of their superior performance, long-standing CEOs have become synonymous with the brand identity at some iconic companies such as J.P. Morgan, Salesforce, Netflix, and more. 

As these companies look ahead to the future, succession planning is crucial for long-term success. When executed well, succession planning ensures business continuity, provides a framework for talent development, mitigates risk, and provides companies with a competitive advantage by ensuring their company has a stable leadership team. 

But when done incorrectly, the inverse is true. Many businesses have faced the brunt of poor succession planning and have paid the price with a loss of reputation, diminishing returns, and a lack of shareholder confidence. Take Starbucks, for example, when former CEO Howard Schultz returned to lead the charge for a third time in 2022. 

The fact that a company of this magnitude had to reinstate a former CEO for the third time as an interim solution shows that the company simply was prepared for his initial departure. Moreover, the subsequent turnover of those who stepped into his shoes illuminates that proper planning was not done. In the process, the company's stock prices dropped -24%. 

Disney-Peltz: A Cautionary Tale 

While activist investors can help create shareholder value, they often also act as distractions from focusing on executing against defined strategies. With the year just starting and the market looking as uncertain as ever, the Disney-Peltz story serves as a reminder for corporate strategy professionals on multiple fronts. 

For one, it points to the importance of attaining business agility to successfully navigate the challenges that lie ahead. It also highlights the need for moving cautiously and taking proactive steps to evaluate plans based on market research, trends, and proper revenue forecasting mechanism. Ultimately, this requires strategy teams with the right skill sets to make the right call and decisions to navigate uncertainty easily. 

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